ABA writes to FDIC, FED and OCC

May 26, 2015

In his letter to the FDIC, FED and OCC, Vice President of Accounting and Financial Management of the American Bankers Association (ABA), Mike Gullette, mentions that US constituents cannot accurately reflect on the Basel Committee for Banking Supervision’s (BCBS) recent consultative document on accounting for expected credit losses prior to the FASB releasing its current expected credit loss (CECL) model.

Gullette explains that once the BCBS finalizes the consultative document, Guidance on Accounting for Expected Credit Losses, it will be used by international banks and “by the US banking agencies in the examination and supervision of constituent banks regarding credit risk management and the other processes relating to accounting for credit losses.”

Gullette argues that without knowing the final guidance of the FASB’s CECL model, US stakeholders cannot undergo a substantive review of the BCBS’s consultative document. He states that certain wording within the CECL standard can have significant implications on the level of flexibility exercised by regulatory bodies. Gullette mentions that until the CECL standard is finalized, we cannot effectively comment on the consultative document because we do not know how it may intertwine with CECL.

He acknowledges that the timing of this consultative document indeed makes sense for international institutions, whose accounting body (IASB) released its expected credit loss model, IFRS 9, in July of 2014; however, he deems it “premature” for those who follow the FASB’s standards, and offers that “It is difficult to finalize guidance for a standard that does not yet exist.”

Prior to Gullette’s letter to the regulatory bodies, another ABA member solicited the FASB to provide an additional workshop for the CECL project to better understand the model and ensure that all stakeholders are represented. This request comes in large part to address Gullette’s current concern of not having enough information on the CECL model to make informed decisions.

The change from an incurred loss model to an expected loss model is a drastic one that has far reaching implications on various aspects of how a financial institution approaches its risk management processes. It is no surprise, therefore, that many stakeholders are concerned about the transition to the new framework. With that said, there are various ways institutions can prepare based on information currently available, but expect more documentation to come from the FASB (and subsequently from ALLL.com) as the CECL model arrives at the finishing stages.